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The rise of the renminbi

The advance of the renminbi continues, as the UK Chancellor urges London to become a 'western hub' for the currency. Why is the RMB causing so much excitement, and what is likely to be its ultimate destination?

How the campaign began

In recent years, the Chinese authorities have moved to liberalise the renminbi while striving to maintain control of their economy and cross-border flows of capital.

It's seven years since Hong Kong banks began to offer offshore renminbi accounts. Currency swap agreements with foreign central banks have been in place since 2000. Offshore bonds were launched in February 2010, and there was keen interest when the Hong Kong Monetary Authority, with China's backing, said it would allow RMB bond business to be carried out in Hong Kong.

Recent developments

More recently, Beijing has been making further moves to allow the RMB to flow in greater quantities through an ever-increasing number of channels. For instance, there has been a pilot scheme to allow offshore funds to raise RMB onshore for offshore investment.

All this is part of the process of internationalising the currency, with the ultimate goal of making the RMB a reserve currency candidate.

In trade terms, internationalisation is already here: total trade settled in RMB increased fourfold in 2011 to reach RMB 2.1 trillion, while China now has bilateral currency swap agreements with 19 countries to a value of RMB 1.6 trillion.

Unfair competition?

Inevitably, some see this advance as a threat. Brazil and India are among the countries which see the RMB as undervalued, and accuse the Chinese authorities of manipulation.

In fact, having appreciated 30% against a basket of currencies since 2005, the RMB is now seen by many analysts as being closer than ever before to a fair value.

The ability to settle transactions in RMB provides greater choice for businesses: it can allow them, for instance, to shed the costs of currency conversion. In this way, says HSBC's head of foreign exchange strategy, David Bloom, a company can "take away the financial pain" from its trading partner - and gain a benefit of its own.

"You might have a renminbi price that is much more of a discount than a dollar price," he explains, "because if a manufacturer gives you a dollar price, it may have within it various costs associated with having to do that business."

Other potential advantages include the option to use hedging to manage the currency risk of trading in China, or to issue bonds in RMB to match assets and liabilities.

The end of the line?

Further liberalisations are expected in the coming months. The true test will be how far the Chinese state is prepared to go in ceding control over its inflation rates and the value of its currency.

But the direction is clear. Commentators differ on exactly when the renminbi (RMB) will become freely convertible and stake its place among the world's top three currencies. But, barring a major upset, it's only a matter of time before the so-called 'redback' becomes a reserve currency.

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